GO
Loading...

Why Are India's Retailers Afraid of Wal-Mart?

Tuesday, 30 Oct 2012 | 4:47 AM ET

Indian supermarket chain owner Ramesh Lahoti says he has every reason to fear encroachment by global retailers — since 2007 he has had to close five of his M.K Retail stores in the southern city of Bangalore due to stiff competition from Germany's METRO Cash & Carry.

India Today Group | Getty Images

If Wal-Mart, the world's biggest retailer, sets up shop near his existing eight stores in India's third most populous city, Lahoti says the future of the family-run business will be in jeopardy.

"There's a question mark over the future of my establishment," Lahoti, 50, told CNBC. "We cannot compete…What will happen when I keep on closing my shops? Ultimately after 10 years there will only be big retailers."

Lahoti is one of millions of Indian shop owners who staunchly oppose a government ruling last month to allow foreign multi-brand retailers such as Wal-Mart to open stores in India.

The reforms to India's $450 billion retail market are part of economic measures aimed at reviving growth in Asia's third biggest economy and staving off the threat of a downgrade to India's long-term credit rating.

But, foreign investment into retail has caused a major uproar with protests, mass rallies and the burning of effigies of the government.

The Confederation of All India Traders (CAIT), a trade group that represents 50 million local businesses, says global giants such as Wal-Mart are not welcome in India, because their "deep pockets and enormous resources" will squeeze local retailers.

"We don't want any global retailers to come to India," Praveen Khandelwal, National Secretary General at CAIT in Delhi said. "If they are allowed to operate their business activities in India, there will be an uneven playing field, where the existing retailers will not be able to compete."

Independent retailers such as mom-and-pop shops, known locally as "kiranas," dominate India's retail market — holding a 93 percent market share over corporate retailers at 7 percent, according to consultancy firm Technopak.

Wal-Mart Effect Inflated?

Wal-Mart has said it hopes to open its first stores in India within 18 months. Under the Indian government's latest proposals, global firms like Wal-Mart and Britain's Tesco would be able to buy up to a 51 percent stake in Indian supermarkets.

The new rules will enable global retailers to sell directly to Indian consumers. Previously, multi-national retailers could only operate wholesale businesses.

Technopak Chairman Arvind Singhal said concerns that Wal-Mart will wipe out competition are overblown, with enough room in India's retail space for both traditional shops and big-box stores to operate as consumption grows.

He expects corporate retail chains to grow their market share by 13 percent by 2021, while independent retailers will still hold to up to 80 percent of activity in the industry.

"We don't see any reason why consumption for the next 20 to 30 years will not continue to grow strongly," Singhal said.

India's retail market will nearly double in value to $810 billion by 2021 amid increased consumption by a rapidly growing middle class, according to Technopak.

Evidence that mom-and-pop shops are holding on to their huge market share despite the emergence of local supermarket chains like Big Bazaar in the last five to six years shows they haven't been significantly impacted by corporate chains, said Dheeraj Sinha, author of the book "Consumer India: Inside the Indian Mind and Wallet."

"A lot of them [kiranas] have undergone a makeover and they've started stocking things that they wouldn't otherwise stock," Sinha said. "The neighborhood retailer has actually upgraded themselves to the challenge."

Aninda Mitra, Head of Southeast Asia Economics at ANZ backs that view, adding that while there is likely to be some dislocation when Wal-Mart opens its India stores, entire segments of the Indian retail sector are unlikely to disappear as feared.

Bloomberg | Getty Images

"How that can happen in such a large country remains to be answered. It's not as if Wal-Mart's taking over everything," Mitra said. "It is a very local segment that has been able to capture a lot of political attention, but there's not necessarily genuine economic fear of widespread destabilization of the retail market."

Analysts say the entrance of Wal-Mart could actually improve India's supply chain distribution issues, which have been plagued by infrastructure and inefficiency woes.

Neighborhood shop owner Vestupal Sandhvi, who has been running his family grocery business Mookambika Traders for about 25 years in a Bangalore suburb, however, said he doesn't see any of the benefits that Wal-Mart could potentially bring.

"Already we are losing 40 percent business to METRO Cash & Carry; Wal-Mart will create a problem throughout India," Sandhvi said.

The shop owner says that because Wal-Mart receives financing abroad at rates of 2 to 3 percent, it is difficult for India's small retailers to upgrade their businesses in order to compete, since taking out a loan with local banks entail high interest rates at around 18 percent.

"I'll be doing the same business, I can't change the business," he said.

Location, Location, Location

Ultimately, consumer spending habits could determine whether or not India's local retailers are able to compete alongside the likes of Wal-Mart.

Mumbai resident Anuja Kothari, 32, said she doesn't expect the shopping experience at Wal-Mart to be much different from what is already offered by India's big supermarket chains, and location will be biggest factor in her decision to shop there.

"It all depends on which area it [Wal-Mart] comes up, because there are many supermarkets already in India and each is running because it is in a particular location," Kothari said.

Miloni Shah, 27, who also lives in India's financial center, said she looks forward to visiting Wal-Mart for items she needs on a monthly basis, and still plans to shop at the neighborhood store for daily goods.

"All the local grocery stores are really small, cramped and you don't even have the option to walk around and see. You go there knowing what you want and you ask for it," the private equity professional said. "But when you go to Wal-Mart or a big supermarket, you have the whole concept of taking the cart, walking around, seeing things you want."

Software engineer Pavan Kumar, in Pune, a tier-two Indian city, backs that sentiment, saying that while he expects a better shopping experience at Wal-Mart, he does not expect a drastic change to the way he shops.

"Over the last 10 years, we moved from small shops to the bigger malls and retail chain stores," Kumar said. "Wal-Mart will be another addition; it's not going to produce something totally different."

- By CNBC's Rajeshni Naidu-Ghelani.